Law and legal definition both are complicated and there is a lot of meaning in between the lines. Most people do not understand it and therefore find them in the vicious cycle of debt. Moreover, loans and money lending laws can vary from one state to another though the primary objective of the framing and enforcing such laws are in accordance to that of the federal government.
- There may be a few states that will restrict the money lenders to provide money to borrowers at an interest rate that is in excess of the set statutory maximum. This is called the “usury limit.”
- On the other hand, banks may have separate set of rules which is why in 1980 the federal government passed a new law that allowed the national banks raise the state usury limits of the rate of interest by a few points above the Federal Reserve discount rate.
- In addition to that special chartered organizations such as small loan companies, installment plan sellers, car financing companies and others may have their own rules. You can come to know about these specific and divers set of rules when you visit sites such as https://www.libertylending.com/ or others.
All these situations called for an immediate focus and formulation of The Truth in Lending Act. This is a federal law that requires that all money lenders must explain all the terms, conditions and consequences of a consumer credit transaction fully. Apart from that the law also encompasses the ads to make a sale except the statements made by a clerk or a salesperson.
Law regarding the loans
If you need a personal loan or use your house as collateral for a loan, you have the legal right to cancel the credit transaction within three days according to your “right of rescission” in the Federal Truth in Lending Act.
- The law of loan says that a person can be financed only on the basis of their creditworthiness and their current financial conditions. On the other hand, a business is usually financed either by debt or equity or by both as it is commonly done depending on the debt-equity ratio which is the liabilities divided by the equity of the company.
- It also says that all debts are based on contractual arrangements. This agreement is made between the money lender called creditor and the borrower. This agreement includes the principal amount, the interest, repayment terms and lots more.
- All types of loans, even leasing of rental space or of equipment, must be recorded as liabilities in the books of account of the companies.
Characteristics of loan transactions
There are different characteristics of lending and borrowing transactions and all of these are very closely related. These are:
Time factors: This is the time for which a loan is given to the borrower. It can be of different types such as short term, intermediate and long term loan. However, the revolving credit better known as ‘line of credit’ and perpetual debt may not have any fixed retirement date where you can draw down, pay back and borrow again if you need.
Cost factor: This is the rate of interest charged on a loan and can be fixed for the specific term or may be variable. Variable rates, also known as floating rates, can be adjusted daily, annually, or at an interval of 3, 5, and 10 years. However, the floating rates are tied to an index such as the prime federal lending rate.
Risk and security factor: The risk of any loan is covered by the money lender with the assets pledged by the borrower as security against the loan. This is called collateral and such credits are called secured debts. All real estate, auto loans and mortgages are secured loans. All unsecured loans such as personal and credit card debts rely on the earning potential of the borrower.
Types of loans
The law also defines the most common types of loans that a money lender can provide. Though in all cases you will be provided with a sum of money that you are legally obligated to return to the creditor with interest, the segregation of the loans in different types simply helps the creditors to draft their lending policy according to the specific type of loan.
All consumers or small and big businesses obtain various types of loans according to their needs and of course their eligibility. All these different types of loans will vary in amount, rate of interest and maturity. Loans may be required for various purposes and therefore different names are given. The purposes can be and not limiting to the following:
- To fund purchases of real estate
- Private or business transportation
- Production equipment
- Home appliances
- Raw materials and parts
- Funding college education for kids
- To pay the medical bills and
- For any personal needs.
The law also ensures that the borrowers obtain these loans from legal sources that are varied, many and includes:
- Credit unions
- Finance companies
- Insurance companies
- Leasing companies and
- Trade credit.
There are also many different state and federal governments sponsored loan programs that you can avail to support your financial needs, personal or for your business.
Dealing with the mixed motives
Virtually all lenders and borrowers have different motives to take out a loan and it also depends on the situations as well. It is due to these mixed motives that may give rise to conflicts between the parties involved, at least on the point of margins.
- The primary motive of the borrower will be to obtain the required financing at the least possible cost.
- On the other hand the basic objective of the money lender is to loan out money at the highest possible rate so that they can make the most profit in risking their money on a ‘stranger.’
- As for the independent investors in a business they will have a different set of motives which is to pay as little as possible and leverage their investment to the maximum level.
Under current law everything is kept in a proper line to safeguard the interest of the borrowers as well as the creditors.